Wage Traps as a Cause of Illiteracy, Child Labor, and Extreme Poverty
AbstractWhen labor incomes approach subsistence levels, the labor supply curve slopes outward, because the fight for survival mandates households to look for longer work hours in response to falling wage rates. We explore conditions under which near-subsistence scenarios may imply wage traps, labor market failures that can be the cause of undernourishment, illiteracy, and child labor. After stating general conditions under which wage traps occur, we look at specific production functions typically employed in quantitative analyses of growth and development. We find that standard Cobb-Douglas production functions do not permit wage traps, whereas CES functions do. Beyond that it turns out that when subsistence requirements increase with work hours, and when work effort rises with the wage rate, up to the efficiency-wage threshold, wage traps become more likely. Measures such as bans on child labor, implementation of minimum wage laws, or the establishment of labor unions may quite effectively improve conditions in wage-trapped labor markets.
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Bibliographic InfoPaper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-02.
Length: 23 pages
Date of creation: Jan 2008
Date of revision:
Subsistence income; labor supply; poverty; child labor; wage trap; market failure; development; growth;
Other versions of this item:
- Gärtner, Dennis L. & Gärtner, Manfred, 2011. "Wage traps as a cause of illiteracy, child labor, and extreme poverty," Research in Economics, Elsevier, vol. 65(3), pages 232-242, September.
- J2 - Labor and Demographic Economics - - Demand and Supply of Labor
- J4 - Labor and Demographic Economics - - Particular Labor Markets
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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